End of the pain in Spain

Few European countries are as dominated by the banks as Spain. When Santander acquired Banco Popular last year, it put around 80 percent of the country’s business financing in the hands of just five banks.

For non-bank lenders, this does not appear to leave much space to move into – unlike in other European countries where bank influence has been waning. All that many investors see is a bun fight at the larger end of the market between banks seeking to protect their already hefty market share and pan-European debt funds seeking to challenge them with unitranche offerings.

The result, market observers say, is a highly aggressive environment characterised by tight spreads in the mid to upper end of the market. This also happens to be the more visible part of the market – and helps to explain why Spain has not developed into a leading private debt location thus far.

Look a little closer, though, and you will find many smaller businesses crying out not just for capital, but also a diversification of their financing sources.

This is made necessary by the banks’ swollen balance sheets. Some of the larger ones are already pretty much at the limit of their exposure to SME credits allowable under Basel III regulations. Corporate credit makes up around 22 percent of Spanish banks’ books, compared with a figure closer to 10 percent in the UK and other European countries.

But even if the banks were able to lend more to SMEs, would they actually do so? Some say that the tough times experienced by many companies during and after the global financial crisis resulted in poor performance that gave them a toxic reputation with the banks – even though there were clearly extenuating circumstances. As the Spanish economy has revived over the last few years, the banks have been reluctant to put faith in the growth stories of companies they still view in a bad light.

Keen not to have to limit themselves to knocking on the doors of a handful of banks – and wary of the reception they will get in any case – entrepreneurs are increasingly prepared to engage with a clutch of SME-focused debt funds that have popped up in recent times. The likes of Resilience Partners and Trea Direct Lending are part of a still small but growing population of fund managers not so obsessed with what’s happened in the past – instead showing a willingness to back growth plans as SMEs finally have the confidence to focus on expansion rather than survival.

It’s still early days for Spanish non-bank SME lending and the success or otherwise of the strategy will only become evident once a material number of funds have been fully invested and realised. But a reasonable number of these funds are in the market and attracting decent investor support. The thesis at least is gaining traction.